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Leverage and pricing of debt in LBOs

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  • Colla, Paolo
  • Ippolito, Filippo
  • Wagner, Hannes F.

Abstract

We show that the structure and pricing of debt in LBOs mostly depend on a single characteristic of the target firm, pre-LBO profitability. We find a positive relationship between pre-LBO profitability and deal leverage that is consistent with a dynamic trade-off theory of capital structure in the presence of adjustment costs. We argue that the wide range of debt tranches used in LBO financing can be folded into two main categories, senior and junior debt, where the pricing of senior and junior debt depends on their relative use and on bankruptcy risk. Our evidence also suggests that senior lenders oversupply cheap credit during hot buyout markets.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Corporate Finance.

Volume (Year): 18 (2012)
Issue (Month): 1 ()
Pages: 124-137

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Handle: RePEc:eee:corfin:v:18:y:2012:i:1:p:124-137

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Web page: http://www.elsevier.com/locate/jcorpfin

Related research

Keywords: Leveraged buyout; Senior and junior debt; Term loans; High-yield debt; Private equity;

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Cited by:
  1. Al-Shboul, Mohammad & Anwar, Sajid, 2014. "Time-varying exchange rate exposure and exchange rate risk pricing in the Canadian Equity Market," Economic Modelling, Elsevier, vol. 37(C), pages 451-463.

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